By Stephanie Jacob
Assuming Sona Petroleum Bhd receives the Securities Commission’s green light to buy Stag Oilfield, the ultimate decision then lies with the shareholders. Should they allow the company to be liquidated and come away with some profit, or take the risk of sticking with Sona’s management?
It must be nervous times at Sona Petroleum Bhd as the clock ticks towards July 29, 2016 which is the deadline for it to secure a qualifying asset or acquisition (QA), especially for its management team who get nothing back.
Some of that worry might have lifted on Nov 2, 2015, when Sona announced to Bursa Malaysia that it was looking to purchase the Stag Oilfield which is located off Northwestern Australia for US$50 million (RM213.5 million).
As a special purpose acquisition company (Spac), Sona needs to buy a QA within three years of listing in order to graduate to a regular-listed company. With only eight months until its QA deadline, this deal is probably the management’s last chance.
But based on its proposed acquisition, Sona is still some way from graduating into a fully fledged oil and gas company as several issues make approval far from a sure thing.
Since it announced the deal to Bursa Malaysia, pertinent questions have been lobbed at the management regarding the valuation, quality and suitability of the asset which it plans to purchase.
Sona plans to buy the production licence WA-15-L and pipeline licence WA-6-PL (Stag Oilfield) and the associated assets from Quadrant Northwest Pty Ltd and Santos Offshore Pty Ltd. Currently Quadrant owns 33.3% while Santos has the majority share with 66.7% of the producing oil field.
Sona will pay US$50 million for a 100% stake but some are questioning whether or not the company is overpaying given the age of the asset. Santos’ general manager for Western Australia and Northern Territory Joe Ariyaratnam justified his company’s decision to sell saying “Stag had delivered a strong production performance over the life of the field but it was now mature and no longer core to the company’s strategy”.
This raised concerns that the Stag field may be past its prime. The price tag was further questioned because a Wood Mackenzie report suggested that Santos’ stake was only worth US$13 million. If Quadrant’s stake is assumed to be about US$6.5 million, then based on Wood Mackenzie’s assumptions, Stag would only be worth about US$19.5 million, or just less than 40% the amount that Sona is paying of US$50 million.
However, in a reply to KINIBIZ, Sona justified its valuation, saying that the report only factored in the field’s proven reserves at its current production rate, up until 2019. It emphasised that its valuation took into account the oil field’s total lifespan and full potential including probable and possible reserves and that it plans further development to unlock these reserves.
This still means that Sona will have to make further investments beyond the US$50 million. And the question is whether future potential production is enough to justify the investment especially given volatile oil prices.
Ironically, while some are asking if the price tag is too steep for an ageing asset, there are concerns that Sona may not be spending enough on its QA. As a Spac, Sona was required to place 90% of its initial public offering (IPO) funds into a trust account and regulations dictate that it must use 80% of this money for its QA.
It has RM525.6 million in its trust account and the US$50 million purchase price will only account for about 40.9%. However, Sona hopes to be able to meet SC regulations by using the remainder on capital expenditure (capex) for infill drilling.
The company will need the SC’s blessing and it said it has been in constant consultation with the SC and hopes it will get their approval. So far the SC has taken a firm line when it comes to enforcing its regulations, so it will be interesting to see if they allow Sona’s proposal.
In reply to KINIBIZ, Sona said it was unable to disclose details on its development plans, but one assumes that it will have to do so for the SC to green light the plan. Furthermore, shareholders will also want to see a plan as after the QA goes through they lose the authority to approve or disapprove capex decisions.
And even if it passes muster with the SC, there is no guarantee that the shareholders will go for it. Under Spac regulations, a majority of shareholders must approve a QA before it can be purchased.
Under the SC’s regulations, if a Spac’s shareholders opt to vote “no” on the Stag deal, then the money held in trust will be liquidated among them on a pro rata basis. This will exclude the shares which were owned by management at the point of IPO but include shares they bought on the open market.
Although it might seem strange for shareholders to not want their Spac to graduate, there is actually some sense to it, said financial analysts. According to Hong Leong Investment Bank (HLIB), should Sona fail to acquire a QA in time, the shareholders stand to make 47.9 sen per share which is about 6.3% upside from the current price.
Sona is trading at 45 sen today, which is the same level it closed at on Oct 30 before the announcement was made. This might suggest that the market sees limited upside from this acquisition.
While the management is desperate to do any deal to allow it to graduate, shareholders are bound to ask whether it is more worth it for them to just let the clock run out on July 29 and come away with some profit.
In a way, Sona’s and its shareholders’ dilemma reflects an inherent weakness in the Spac structure. The management is under great pressure to get a QA within the time frame and may therefore compromise valuation under the circumstances at the expense of shareholders.
That is often not necessarily so for shareholders who might benefit more from having 90% of their money returned. Thus the management’s and shareholders’ interests are often misaligned.
Also, there is an issue of checks and balances involved – it is pretty difficult to know if the deals are done completely above board and at arm’s length. What is to prevent management from agreeing to high valuations in return for some gains, which may even be illegal?
The record of Spacs so far has been rather dubious – Hibiscus Petroleum’s share price took a beating recently despite having acquired a QA and has yet to hit any significant discoveries. Meanwhile, there are continuing problems at others who are struggling to secure a QA. This indicates that Spacs may need to be reviewed or even scrapped.
GRRRRR!!!
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